Why is insurance so complicated?
Buying insurance is painful. Here’s what we can do about it.
In 2018, I moved back to the US after four years abroad to pursue my MBA at Stanford. I needed health insurance, so I turned to California’s state exchange.
My head spun trying to grasp insurance jargon — terms such as deductible, coinsurance, co-pay, and out-of-pocket maximum. And I am not alone. Only nine percent of Americans “showed an understanding” of these four basic health insurance terms, according to the UnitedHealthcare Consumer Sentiment Survey. Another 2014 study by Kaiser Health News found that, while 75 percent of Americans say they are confident they know how to use health insurance, only 20 percent could correctly calculate how much they would owe for a routine physician visit.
Even if you are part of the 50 percent of Americans who receive health insurance via your employer and therefore do not need to navigate the convoluted purchase process, you still need to comprehend your benefits coverage. According to the Financial Health Network, only half of Americans are moderately or extremely confident that their existing insurance plans (health, vehicle, home/ rental, life and disability) would provide enough support in case of an emergency. Think of how many families have tried to be responsible by purchasing insurance only to be abandoned when in critical need.
As a last proof point of just how complicated insurance is, in the past few months I became a licensed insurance agent and broker for health, life, disability, property, and casualty insurance in California, meaning that I can sell these plans to consumers and businesses. I studied harder for these professional certification exams than for any class at Stanford.
So why is insurance so complicated?
Cynically, the complicated nature of insurance policies gives insurance companies more leeway to deny claims. Limiting claim payouts controls risk and generates profits for insurance companies. Furthermore, many industries, from insurance to law to finance, use complicated terms and professional licensing requirements to maintain high wages for people working in those industries. In the case of insurance, asymmetric understanding of policies protects the commission structures of agents and brokers who sell insurance.
So what can be done? Within insurance, we need a movement towards plain language legal writing. The Affordable Care Act was a step in that direction. The Act required each insurance plan to disclose a four-page standard format description document and state the amount paid for routine medical conditions, such as having a baby or managing Type 2 diabetes.
In the late 1970s, states including Connecticut, New York, New Jersey, and Hawaii passed plain language laws requiring readable insurance policies, defined by a minimum score of 45 on the Flesch reading ease test.
It is time to pass and enforce analogous plain language legislation across all states. Today’s complicated state of insurance means that people are not buying the plans that are the best fit for the risks in their life and that people with plans sit with a false sense of security until abandoned at their time of need. The complicated language used to obfuscate coverage is an existential threat to the entire insurance industry, as customers increasingly lose trust in products designed to insulate them from financial ruin. Within insurance, it is high time to keep it simple, stupid.
